The Price of Low Inflation (Part 2 of 2)

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The Price of Low Inflation (Part 2 of 2)

Table 7 : Estimates with WPI Inflation

	1971-	1971-	1971-	1971-	1985-	1985-	1985-	1985-
	2001	2001	2001	2001	2001	2001	2001	2001

Specification	4	CE	4a	CE	4	CE	4a	CE


Constant	-2.94	-7.26	-5.32	-7.11	-2.17	-4.79	-2.05	-5.18
	(-1.3)	(-10.2)	(-2.0)	(-8.5)	(-1.3)	(-7.0)	(-1.2)	(-7.0)

dx_t	0.34				0.29
	(2.1)				(2.7)

		0.67				0.44
		(6.9)				(4.9)

dx_t +			0.55				0.30
Ygap_t-1			(2.9)				(2.7)

				0.68				0.48
				(7.8)				(5.1)

p_t-1	0.23		0.27		0.45		0.38
	(1.9)		(2.2)		(3.3)		(2.7)

YGAP(-1)	0.71	1.11			0.47	0.63
	(2.4)	(5.2)			(2.6)	(3.6)

WPIFG	0.46	0.35	0.40	0.35	0.25	0.20	0.29	0.24
	(3.9)	(2.9)	(3.9)	(3.7)	(4.5)	(5.7)	(4.1)	(5.0)

DUM74	3.99	3.15
	(2.6)	(2.2)

DUM80			11.4	11.7
			(10.7)	(13.2)

DUM8081	9.08	8.79
	(12.5)	(8.7)

DUM95					4.25	4.44
					(5.3)	(4.9)

DUM97					-3.63	-3.69	-4.08	-4.17
					(-9.0)	(-7.9)	(-9.6)	(-9.2)

DUM01	3.84	4.73	4.90	5.33	3.88	4.74	4.04	5.09
	(4.8)	(7.3)	(4.8)	(7.2)	(5.2)	(13.8)	(6.0)	(19.4)

DW/Durb-	0.5	1.7	-0.06	1.9	0.3	2.0	-1.1	2.6
in’s h/h-alt

R*2	77.8	83.9	72.3	81.5	76.8	73.2	66.2	61.6

Sacrifice ratio

(1-l)/l	1.9	0.5	0.8	0.5	2.4	1.3	2.3	1.1
t-statistic	1.4	2.3	1.3	2.4	1.9	2.8	1.9	2.6
p-value	0.16	0.02	0.18	0.02	0.05	0.01	0.06	0.01

b/l	0.7		0.5		1.6		1.3
t-statistic	1.4		2.2		2.1		2.0
p-value	0.15		0.03		0.04		0.05

b/a	0.3				1.0
t-statistic	2.9				2.8
p-value	0.003				0.006

Diagnostic tests	P-VALUES

CSMAX	0.51	0.86	0.40	0.41	0.20	1.00	0.81	1.00

CSQMAX	0.16	0.43	0.05	0.09	0.04	0.24	0.11	0.10

CHOW	0.77	0.52	0.73	0.65	0.60	0.93	1.00	0.99

JB	0.44	0.45	0.53	0.55	0.98	0.65	0.77	0.73

RESET2	0.02	0.51	0.02	0.17	0.76	0.80	0.85	0.23

Note: * = not significant; CE = constrained estimates The table presents estimates for the specifications (4,4a) p_t = ldx_t + bp_t-1 + a(ygap)_t-1 + mz_t (4),_pt = l(dx_t + (ygap _t-1) + bp_t-1 + mz_t (4a),dx = Growth rate of nominal GDP; other variables as before. Both 4 and 4a are also estimated with the constraint l = (1 -b) and these estimates are shown under the column CE. Also, see notes to Table 5.

Table 8 : Estimates using GDP deflator
(Specification As in Table 7)

	1972-	1972-	1972-	1972-	1985-	1985-	1985-	1985-
	2001	2001	2001	2001	2001	2001	2001	2001

Specification	4	CE	4a	CE	4	CE	4a	CE


Constant	0.10	-3.84	0.61	-4.08	-1.30	-2.96	-1.24	-3.23
	(0.1)	(-7.8)	(0.3)	(-9.2)	(-0.8)	(-4.4)	(-0.8)	(-6.0)

dxt	0.43				0.40
	(4.1)				(3.8)

		0.65				0.46
		(5.7)				(4.5)

dx_t + ygap_t-1			0.45				0.43
			(3.9)				(4.6)

				0.75				0.50
				(7.4)				(6.9)

p_r-1	0.24		0.17		0.43		0.39
	(1.8)		(2.0)		(3.2)		(5.4)

YGAP(-1)	0.60	1.02			0.50	0.60
	(2.9)	(7.9)			(3.0)	(5.0)

WPIFGRELG	0.35	0.27	0.27	0.18	0.22	0.21	0.21	0.19
	(5.5)	(4.0)	(5.0)	(2.6)	(3.5)	(4.0)	(3.2)	(3.2)

UVMGRELG			0.04	0.02
			(2.4)	(1.1)*

DUM79			-3.08	-2.52
			(-5.0)	(-3.7)

DUM80			5.61	6.88
			(6.5)	(9.5)

DUM8081	4.43	4.22
	(5.5)	(4.0)

DUM94	3.71	4.07			2.99	3.11	2.70	2.67
	(5.8)	(6.2)			(4.6)	(5.3)	(7.0)	(6.8)

DW/Dur-	-0.4	2.0	0.1	2.1	-0.7	2.3	-0.7	2.4
bin’s h/h-alt

R*2	81.3	87.4	82.2	87.4	66.5	60.7	68.8	62.3

Table 8 : Estimates using GDP deflator (Contd..)
(Specification As in Table6)

	1972-	1972-	1972-	1972-	1985-	1985-	1985-	1985-
	2001	2001	2001	2001	2001	2001	2001	2001

Sacrifice ratio

(1-l)/l	1.3	0.5	1.2	0.3	1.5	1.2	1.3	1.0
t-statistic	2.3	2.0	2.1	1.9	2.3	2.4	2.7	3.4
p-value	0.02	0.04	0.03	0.07	0.02	0.02	0.01	0.00

b/l	0.6		0.4		1.0		0.9
t-statistic	1.6		1.9		2.1		3.8
p-value	0.11		0.06		0.03		0.00

b/a	0.4				0.9
t-statistic	2.3				4.5
p-value	0.02				0.00

Diagnostic tests	(P-VALUES)

CSMAX	0.69		0.87		1.00	0.73	1.00	0.86

CSQMAX	0.03		0.49		0.89	0.69	0.90	0.80

CHOW	0.91		0.59		0.57	0.52	0.62	0.39

JB	0.65		0.69		0.99	0.80	0.94	0.89

RESET2	0.33		0.75		0.60	0.29	0.63	0.33

See notes to Table 5.

Table 9 : Estimates using GDP Deflator
(Using Specification 6and 7)

	1972-2001	1972-2001	1985-2001	1985-2001

	Dependent Variable

	(p_t - p_t-1)	(dq_t - dq*)	(p_t - p_t-1)	(dq_t - dq*)

CONSTANT	-0.92	0.50	0.01	-0.42
	(-2.4)	(1.4)	(0.001)	(-1.4)

dx₊ - (p_t-1 + dq*)	0.58	0.35	0.63	0.32
	(4.3)	(2.7)	(3.8)	(2.1)

WPIFGRELG	0.30	-0.29	0.17	-0.16
	(3.7)	(-3.7)	(1.8)	(-1.8)

DUM72	4.15	-3.69
	(8.8)	(-8.1)

DUM77	6.68	-5.92
	(6.0)	(-5.5)

DUM80	10.3	-8.99
	(17.4)	(-15.4)

DUM89			-4.04	3.81
			(-5.1)	(5.2)

DUM97			-2.43	2.31
			(-6.0)	(6.1)

DW	2.3	2.3	2.2	2.1

R*2	84.4	53.0	57.1	55.3

Sacrifice ratio
(1-a)/a	0.7		0.6
t-statistic	1.8		1.4
p-value	0.07		0.16

Diagnostic tests

CSMAX	0.14		0.03

CSQMAX	0.002		1.00

CHOW	0.95		0.17

JB	0.72		0.78

RESET2	0.01		0.01

Note The table presents estimates for the specifications:
(p_t - p_t-1) = c + a[dx_t - (p_{t-1 +}dq*)] + b(WPIFGRELG)				(6)
dqt - dq* = c + (1-a)[dxt - (p_t-1dq*)] - b(WPIFGRELG)				(7)
dqt = growth rate of actual real output; dq* = growth rate of potential real output; other variables as before. Also, See notes to Table 5.

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The authors are Assistant Adviser and Director in the Department of Economic Analysis and Policy. The views expressed in the paper are those of the authors and not of the institution to which they belong.